Holland v. Fuller, 142.

• Decision Date: 27 March 1936
• Docket Number: No. 142.,142.
• Parties: HOLLAND v. FULLER.
• Court: U.S. District Court — Eastern District of Tennessee

14 F. Supp. 688

HOLLAND v. FULLER.

No. 142.

District Court, E. D. Tennessee, N. E. D.

March 27, 1936.

Walter R. Gray, of Greeneville, Tenn., for complainant.

Susong & Parvin, of Greeneville, Tenn., for defendant W. E. Fuller.

Lee, Cox, Meek & Hier, of Knoxville, Tenn., for cross-defendant American Surety Co.

TAYLOR, District Judge.

This case is now before me on cross-defendant American Surety Company's motion to dismiss defendant's cross-bill, the only ground of which to be given consideration in this memorandum is that a provision of the fidelity bond sued upon provides: "At the earliest practicable moment, and at all events not later than ten days after the insured shall discover any loss, the insured shall give the underwriter notice thereof by registered letter or telegram, addressed to it at its home office, and shall also, within three months after such discovery, furnish the underwriter at its home office affirmative proof of loss with full particulars. Legal proceedings for recovery of loss hereunder shall not be brought prior to the expiration of three months from the furnishing of such proof, nor after the expiration of twelve months from the discovery of such loss. If any limitation embodied in this paragraph is prohibited by any law controlling the construction hereof, such limitation shall be deemed to be amended so as to be equal to the minimum period of limitation permitted by such law," and the contention that, by reason of this limiting provision in the contract, the action commenced on June 9, 1934, more than 12 months after the insured discovered the loss, cannot be maintained. A bill of particulars was filed by the cross-complainant on an order of court requiring it, in which it appears that he arrived in Greeneville on June 4, 1933, and qualified as receiver of the Citizens National Bank and entered upon his duties as such on June 5th or 6th; that on June 5th he conferred with the national bank examiners, who were then in charge of the affairs of the bank, and learned from them that there were numerous irregularities in the bank's affairs due to the misconduct of J. H. Rader as its president; that the examiners had received information to this effect on or about the 1st of June, 1933, from the directors, who believed that claims against the American Surety Company would almost certainly arise. The bill of particulars further shows that he then had no definite knowledge of the details of such transactions, but that on June 7, 1933 (which he avers was the earliest practicable moment after his qualification that he could investigate said bond and ascertain its requirements as to notice, and which was less than ten days from about June 1st), he addressed and mailed a letter by registered mail to the surety, in which it was advised that certain losses had been discovered and were claimed under the provisions of the bond, and "said losses have occurred within the period covered by the bond, and the extent of same is not yet fully ascertained. Said losses have just come to the attention of the directors and to the undersigned as receiver of said Bank, under the provisions of the National Banking Act. Within the time provided by said bond, affirmative proof of loss with full particulars thereof will be furnished you, as provided by the bond." In the letter the surety was further advised that it was the belief of cross-complainant that the losses would exceed the penalty of the bond and were due to the dishonest act or acts of the former president, James H. Rader. The bill of particulars further points out that the surety acknowledged receipt of this letter by executing the registry return receipt, and that cross-complainant, on June 24, 1933, mailed the surety at its home office proper proofs of loss covering some thirty-three accounts involving losses which the cross-complainant believed would result in claims against the bank, and upon which the bank would in turn make claim against the surety. One of the claims so listed was the Holland claim involved in this action. The bill of particulars further recites that cross-complainant did not know of this particular transaction until about June 24, 1933, when he, as receiver of the bank, received memoranda from the bank examiners, from which memoranda proofs of loss were prepared and forwarded to the surety.

The motion to dismiss is grounded upon the contention that there is no equity in the cross-bill as to the defendant, and that, by reason of the provisions of the bond, hereinbefore quoted, the cross-bill filed on June 9th was filed more than one year from the date upon which the loss was discovered.

There is great diversity of opinion in reported cases, partly due to differences in the language employed in the contracts which have been before the courts, and there is difference of opinion among attorneys in briefing and discussing the question presented on this motion as to a proper application of the principles announced in certain cases to the facts of this case. There is also apparently serious difference of opinion among counsel as to the ratio decidendi of certain cases relied upon.

Perhaps the first question important to a decision is whether there remains under the cross-complaint and the bill of particulars a question of fact as to the date of the discovery of loss. The surety contends the date of discovery was not later than June 7, 1933, and construes the bill of particulars as so admitting. The bill of particulars recites that the directors of the bank had certain indefinite information with reference to losses as early as about June 1st, but on the final page of the bill of particulars the cross-complainant avers that, as to the transaction involved here, he had no specific information until about June 24, 1933. For the purposes of passing upon this motion I treat the bill of particulars as though an amendment to the cross-complaint and as a part of it. It may be, though I have been unable to find any case directly in point, that the provision of section 16 of the bond leaves room for the maintenance of suit within 12 months as to any specific item of loss earlier undiscovered where it was known generally some loss had occurred. Briefs on neither side illuminate the particular quantum of knowledge requisite to constitute discovery insisted by the surety as the beginning date of the 12-month limitation period. It will be noted from the bill of particulars, however, that cross-complainant did not consider it necessary under the provisions of section 16 to give special notice of loss as each specific item became definite or any other notice of any loss immediately after discovery than the one such notice given June 7, 1933. The only other and more specific notice was that contained in the proof of loss of June 24, 1933. So it is that, if the June 7th notice was not a compliance with the requirement to give the earliest practicable notice after discovery, there was no compliance with that requirement as to any specific claim not definitely discovered on June 7th. The parties so construe, and the court will adopt their construction. It was apparently understood by the parties that discovery generally of facts from which loss would probably arise required the first notice, and nothing more was required until the specific proof of loss, which had to follow within 90 days. In cross-complainant's brief filed November 14, 1935, to the motion of the surety to dismiss the cross-bill, at page 8 thereof and in argument that the notice of June 7, 1933, was compliance with this requirement of the policy with reference to the earliest practicable notice after discovery, this statement is contained: "It does not, therefore, appear from the averments of the bill that cross complainant as receiver had full notice of the Holland transaction, as averred, on June 7, 1933. Notice of loss is notice of irregularities, which may result in loss. It is not contemplated that it shall take the place of proof of loss; or do more than advise the Surety Company of the general situation, which may result in claims against it, and give it opportunity for personal investigation." Thus it will be seen from cross-complainant's own interpretation of the notice of June 7th that it was based upon sufficient discovery and brought sufficient notice to the surety that a situation existed which would probably result in the loss, claim for which is asserted in the cross-bill, and that proof of all losses for which claim would be asserted would follow. I reach the conclusion that June 7, 1933, marks the last day that cross-complainant may contend, under the pleadings, that the loss here involved was discovered.

This leads to a consideration of whether the 12-month period begins with June 7, 1933, or, as contended by cross-complainant, begins 3 months from the date proof, as required in section 16 of the bond, was furnished, that is, 90 days from June 24, 1933.

I am of opinion the decision of this question is one of general law, a decision of which is not controlled by the decisions of the Supreme Court of the state of Tennessee, however persuasive such decisions may be. "The question presented is one of general commercial law. Brooklyn City & N. R. Co. v. National Bank, 102 U.S. 14, 26 L.Ed. 61 (beginning bottom page 29 of 102 U.S.. This case discusses the principles determining the question, though in a case where the...